$3M class-action settlement in Flagstar Bank 401(k) case

Flagstar Bank will pay $3 million to settle a class-action lawsuit filed by its 401(k) plan participants.

The plaintiffs, all former Flagstar employees, claimed that the Michigan-based bank breached its ERISA duties by continuing to offer its own stock as an investment option even though the bank was in serious financial trouble.

U.S. District Court Judge Paul D. Borman of the Eastern District approved the settlement, which included a $5,000 case contribution award for each of the two named plaintiffs, and $962,473 in attorney’s fees and expenses.

The settlement class had 2,952 members.

Borman initially granted Flagstar’s motion to dismiss the case. The judge ruled that the plaintiffs “had not sufficiently overcome the legal presumption, to which the Court concluded Defendants were entitled, that investment in the stock of their employer corporation is prudent and in accordance with their fiduciary duties under ERISA.”

The 6th Circuit reversed. The federal appeals court cited intervening precedent, which held that the prudent-management presumption is an evidentiary matter, and does not apply at the pleading stage.

The 6th Circuit also concluded that the plaintiffs plausibly claimed that “a prudent fiduciary would have discontinued offering Flagstar stock at some point during the class period.”

After remand, the parties began settlement talks. They accepted a mediator’s proposal that Flagstar pay the plan $3 million. The settlement will be allocated to plan participants pro rata under a court-approved method.

The suit alleged that Flagstar imprudently administered the plan from Dec. 1, 2006 to May 2, 2013.

The plaintiffs calculated a range of damages based on when Flagstar’s allegedly imprudent plan administration began — $17.8 million (December 2006); $3.5 million (December 2007), and $1.5 million (December 2009). The plaintiffs conceded that they were most likely to succeed proving the December 2007 date.

In approving the $900,000 attorney’s fee, Borman noted that the “$3 million settlement appears to be an excellent result given the uncertainties of the Plaintiffs’ chances of ultimately prevailing on the issue of liability in this very uncertain area of ERISA and also given the challenges they face in establishing the operative date of imprudence.”